Birkenstock, the 240-year-old German footwear company, dropped jaws everywhere when it announced that it would completely abandon Amazon. It would no longer sell any of its products on the platform, and it would prohibit any approved third-party sellers to sell Birkenstock footwear on Amazon as well.

Birkenstock, along with many other big-label sellers like it, was struggling with a problem that has been plaguing the entire Amazon marketplace as of late. That problem? Counterfeit.

Any open, online marketplace will attract counterfeiters — it’s somewhat inevitable. On top of that, Amazon is the largest online marketplace by far, so it's a natural magnet for malicious sellers of all types. With the open nature of its marketplace, and few restrictions against sellers adding their own products to existing listings, counterfeiting has always been a problem on Amazon.

The problem has been aggravated lately, however, by the influx of Chinese merchants into the US marketplace. Amazon has been aggressively incorporating Chinese merchants onto their platform, registering their own ocean freight company and facilitating entrance into the FBA program for Chinese sellers. Of course, some competition is always healthy, and most of these Chinese sellers are completely legitimate. On the other hand, the culture surrounding intellectual property is vastly different in China compared to the US, and some Chinese manufacturers have few qualms about jumping onto listings with counterfeit products and undercutting prices by huge amounts.

Regardless of the direct cause of the problem, Amazon is taking action against counterfeiters. They don’t want to lose any more big sellers the same way that they lost Birkenstock, nor do they want to lose any more trust in the Amazon brand. So, what exactly are they doing?

Amazon’s New Policy: Brand Gating

Amazon has gated hundreds of brands across its marketplace, meaning third-party sellers will have to get some form of approval to sell these brands.

The exact restrictiveness of the gating varies between brands, but there are two common requirements:

Approval directly from a manufacturer or wholesaler.

A one-time application fee.

The approval can come in the form of a letter or a purchase invoice, but it must be from an official manufacturer or distributor. Some sources say that Amazon will require invoices showing the purchase of 30 items within the last 90 days, although this could vary depending on the exact brand or category.

The application fee, although not required for all gated brands, can range anywhere from $500 to $5,000.

The gated brands range across all categories, including popular brands such as Hasbro and Nike. For this first round of gating, Amazon selected brands that are a) sufficiently high-volume and b) proven to have a medium-to-high risk of counterfeiting.

UPDATE:

Amazon has just announced that sellers who are already selling gated brands will not have to pay any fees to continue selling those brands. The fees only apply to new sellers.

This news should come as an enormous relief to resellers, who won't have to face backbreaking fees to continue selling their most successful branded items. However, it's still unclear how arbitrage will be affected.

Why is Amazon Doing This?

They believe that customer experience is being damaged, and they want to fix it.

Amazon’s decision, as much as it seemingly came out of the blue, is perfectly consistent with their overarching mission: the customer above all else.

Amazon has long marketed itself as “the everything store,” but it seems that, these days, they’re trying to place themselves as a more reliable, but narrower market. It’s a difficult balancing act — on the one hand, an open marketplace increases product selection and can satisfy customers looking for obscure items. Close the marketplace off, and those obscure items might disappear completely. On the other hand, an open marketplace invites the dark side of free-for-all online selling: counterfeiters, listing hijackers, and any other malicious actors who produce dissatisfied customers (and dismayed sellers) for the sake of a quick buck.

With their brand gating policy, Amazon has chosen reliability over product selection.

Amazon wants customers to feel secure in their purchases and keep coming back to Amazon. To them, a potential wider selection is not worth the sense of mistrust and uncertainty that could permeate the whole marketplace if the counterfeiting problem continues unfettered.

Of course, this policy won’t halt all counterfeiting in its tracks, nor will it only affect malicious sellers. Beyond these bad apples, who is actually affected by this policy, and how?

Resellers: “AAAAAAHHHHHH!”

This news, understandably, has created a bit of chaos in the Amazon reseller world, especially for those whose business depends largely on arbitrage.

Not everyone is preaching the end of times. Bigger resellers, in particular, shouldn’t experience too many problems, especially if they source directly from manufacturers or wholesalers. They can more easily front the bill of brand approval, and they can continue selling their most successful brands thanks to their direct supply chains. As an added bonus, they’ll have fewer counterfeiters to worry about, meaning fewer chances of losing the buy box or gathering negative reviews on their listings.

The two groups affected the most by this change, however, are smaller resellers and arbitrageurs.

Smaller resellers, even if they source directly and can provide invoices, will still have to take a huge hit to their profits thanks to the application fees. These fees can stack up and all but sink a business, depending on how many brands the seller will need to apply for.

Ultimately, retail arbitrageurs and online arbitrageurs took the biggest hit here. They will have a very difficult time proving their supply chain in a satisfactory manner — brand ungating requires proof of a direct source, and arbitrageurs, by definition, source their products from retailers.

We've heard many cries signaling the death of arbitrage on Amazon. Although we never like to jump to conclusions too quickly, it will undoubtedly get much harder for many arbitrageurs to sustain business on Amazon.

UPDATE:

As stated before, current sellers of gated brands are being grandfathered into the system and will not have to pay application fees. This is very good news for resellers, since they will not have to pay any fees for brands they already sell.

Note that much is still unclear about the policy, and it may continue to affect arbitrageurs negatively. Although this announcement seems like welcome news, many sellers remain wary.

Private Label: Good News!

Now, for the complete flipside: if you’re a private-label seller, this news is cause for celebration!

Private label sellers won’t have to deal with application fees or proving their supply chain, since they’re selling their own brand. What’s more, this is good news moving forward — Amazon is showing its commitment to brand security and standing against the counterfeit problem that has been plaguing us all.

Although they’ve only gated big brands at the moment, you shouldn’t expect this to be a one-off deal. In an attempt to catch ever-slippery counterfeiters and other malicious sellers, we foresee Amazon closing down brands more and more over the coming months, spiraling inwards to push counterfeiters off the marketplace for good. It’s unclear as to whether they’ll extend brand gating all the way down to private labels, but their emphasis on brand security still stands.

Regardless of how the exact policy plays out, Amazon has acknowledged that they are willing to take serious action against counterfeiters. They already offer a Brand Registry program for private label sellers, which can alleviate the process of removing counterfeit listings — expect more anti-counterfeiting measures to come in the future.

Conclusion

Amazon is always changing, but this may be one of their biggest shifts yet. As much as the platform has advertised itself as “the everything store” in the past, their free-for-all ideology has gotten them into more and more trouble over the years. People no longer want the largest selection possible — they just want to know that they will receive the same thing that they bought.

Brand gating is hugely problematic for sellers relying on retail arbitrage or online arbitrage, but private label sellers should be pleased with these events. As Amazon’s gating policy continues to develop, private label sellers should expect fewer counterfeiters, less time spent dealing with listing hijackers, and overall a much less frustrating experience selling on Amazon.

Any questions or comments? Do you think brand gating is good or bad for Amazon as a whole? Let us know below!